Citigroup leads the way as the western European loans champion but its bankers fear the market may cool. Graeme Neill reports.

When the mergers and acquisitions boom that began late last year reached the western European loan market, it was party time for banks, which had been getting by on several years of cheap refinancings.

However, barely six months into 2006. bankers are keeping their eye out for the inevitable hangover.

Citigroup was bookrunner on deals worth about $125.1bn between January 2005 and April 2006, some $50bn ahead of its nearest challenger. Yet despite its buoyant position in the loan market, Steven Victorin, head of global loans for Europe and North America at Citigroup in London, says the bank is planning for the next turn in the market.

"I don't think anyone believes that the market conditions we are operating under right now represent a fundamental change in the market," he says. The argument is that the present slew of big, tightly priced M&A financings is more than the market can bear for long.

"We are at a point when the market is extremely competitive and active. Clients are being offered some terms and conditions which are extremely aggressive and could present some risk down the road."

Ashu Khullar, managing director in Citigroup's structuring and origination group (loan syndications), says the market changes during the past year have compelled banks to become more flexible. "You need to respond to your clients' needs," he says.

An example of this was Citigroup's Eu7bn club deal with Credit Suisse to support German pharmaceutical company Bayer's Eu16.3bn takeover of rival Schering.

"We had to quickly rethink our strategy while in a meeting with them," explains Khullar. "They didn't want a Eu14bn jumbo syndication because they wanted to take out that paper pretty rapidly. What we did was put a Eu7bn bridge in place."

Another challenging deal Citigroup led was the syndication of Mittal Steel's Eu10.8bn loan to back its hostile takeover of Arcelor.

"We have had to face every trick of the trade that comes with a truly hostile deal," says Khullar. "It's not a huge loan but the hostility and conflicts factors have been challenging. In hostile deals you lose a number of possible banks to conflicts, internal policy or franchise issues in supporting hostile deals, pressure put at their senior levels not to support the deal, and so on."

Unlike some other banks, Citigroup does not have a separate execution or documentation team. Sixteen staff handle sales and origination.

Richard Basham, head of European loan distribution and syndicate, is responsible for six salespeople who sell the product in the primary market, supported by two secondary traders. Sales and trading also supports Citigroup's leveraged and emerging market lending business.

Along with Khullar, five other directors work under Victorin on origination and structuring.

Despite this fairly lean structure, Citigroup believes it is flexible enough to respond to a changing market. Basham says that during the coming year it will be difficult to pinpoint which regions will be crucial.

"The more M&A activity there is, the greater the likelihood of activity happening across the market, whether it is in spin-offs, de-mergers," he says. "The benefit of our franchise is that we are in a position to pick up on those wherever they occur."